The worst inflation in 40 years is hammering American families. The price of gasoline jumped 49.6% from December 2020 to December 2021, according to recent analysis from the Bureau of Labor Statistics. Used car prices jumped 37.3%, meat prices 12.5% and electricity prices 6.3%.
Indeed, of the 31 categories of goods and services measured, only one did not become more expensive: prescription drugs.
This fact will surely shock most Hoosiers, who – like the rest of the country – feel that drugs are getting harder and harder to afford. And in a very real sense, they are right. Patients assume that drugs become more expensive because they pay higher co-payments and coinsurance at pharmacy counters.
But this extra money is not going to the pharmaceutical companies. It is gobbled up by intermediaries in the drug supply chain, who cleverly – but secretly – pass the costs on to patients.
By cutting these middlemen down to size, policymakers here in Indiana and in our nation’s capital could make drugs cheaper for patients — without deterring drug companies from pursuing the next generation of treatments and cures.
Let’s unpack the problem.
Like any other industry, the pharmaceutical sector has a multitude of intermediaries involved in getting pills from factories to the medicine cabinets of patients.
There is nothing inherently wrong with intermediaries. It would be inefficient for a diabetic patient to drive to Lilly’s factory in Indianapolis every time she needs more insulin – just as it would be inefficient for shoppers to drive to a farm every time they need to buy produce or meat, rather than visiting a grocery store.
But unlike grocery stores, whose profit margins are notoriously only 1-3%, middlemen in the pharmaceutical supply chain rake in outsized profits. A recent report from Berkeley Research Group found that 2020 marked “the first year on record that non-manufacturer stakeholders” – including insurance companies and pharmacy benefit managers – pocketed more than half total expenditure on brand name drugs. This revenue normally comes in the form of rebates that insurers and in particular “drug benefit managers” – the secret societies that help insurers administer drug benefit plans – extract
pharmaceutical companies. These PBMs decide which drugs to include in insurers’ plans, giving them immense power to negotiate huge discounts – on average around 30% for most drugs, but up to 70% for many insulins.
In theory, these discounts should save patients money. But in practice this is not the case, at least not when patients go to the pharmacy.
This is because PBMs do not disclose the value of these discounts. So if patients show up at the pharmacy and their insurance plan says they owe a 25% coinsurance payment on a drug, they must pay more than a quarter of the total cost of the drug before reimbursement.
For example, let’s say a supply of insulin nominally costs $400. Patients with this 25% coinsurance requirement would have to shell out upwards of $100 at the pharmacy.
But if the PBM actually negotiated a 70% discount, that means the insulin really only costs $120 in total. Patients end up paying almost all of the actual cost of the drug – with PBMs and insurers barely lifting a finger.
If these patients could instead base their coinsurance payments on the actual post-reimbursement drug price, they would only pay $30 – a huge savings.
Imposing transparency requirements on PBMs and requiring them by law to share a portion of discounts with patients at the pharmacy should be a top priority. Fortunately, the Indiana legislature is already considering a bill that would require PBMs to pass more of their savings on to patients.
PBMs, insurers and other intermediaries are the reason medicines often seem so expensive – even though data shows that prescription drugs are one of the few goods and services to escape the current inflationary crisis. Cutting these middlemen down would bring immense relief to many households here in Indiana and across the country.